Chapter 3 Supply and demand In introduction (Demand supply and market Equilibrium
(Demand, Supply and Market Equilibrium) Chapter 3 Supply and Demand: In Introduction
Topics Demand a Supply Market Equilibrium Tendency to change Intervention Comparative study
2 Topics ◼ Demand ◼ Supply ◼ Market Equilibrium – Tendency to change – Intervention – Comparative study
Demand a The quantity of a good that buyers wish to buy at each price Demand curve: a schedule or graph showing demand
3 Demand ◼ The quantity of a good that buyers wish to buy at each price ◼ Demand curve: a schedule or graph showing demand
Demand: key points a willingness and ability to buy a relationship between guantity demanded and product price -Qd=f(P) quantity demanded is a function of price quantity demanded is determined by price ■ The law of demand Qd and p are negatively related a Demand Curve: downward sloping Market demand the sum of individual demand
4 Demand: key points ◼ willingness and ability to buy ◼ a relationship between quantity demanded and product price ◼ Qd = f (P) – quantity demanded is a function of price – quantity demanded is determined by price ◼ The law of demand: Qd and P are negatively related ◼ Demand Curve: downward sloping ◼ Market demand: the sum of individual demand
Key terms (why downward sloping Substitution effect (of a price change) (willingness to buy) change in quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes Change in Qd when switch to or from substitutes because of p changes a Income effect (of a price change) (ability to buy change in quantity demanded of a good that results because a change in price changes the buyers purchasing power Change in Qd when purchasing power changes because of p changes
5 Key Terms (why downward sloping?) ◼ Substitution effect (of a price change): (willingness to buy) – change in quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes – Change in Qd when switch to or from substitutes because of P changes ◼ Income effect (of a price change): (ability to buy) – change in quantity demanded of a good that results because a change in price changes the buyer’s purchasing power – Change in Qd when purchasing power changes because of P changes
Key term (why downward sloping?) buyers reservation price (willingness to pay) The largest dollar amount the buyer would be willing to pay for a good The benefits the buyer expects to receive (from having it The reservation price of the marginal buyer declines as the quantity of the good bought ncreases 6
6 Key Term (why downward sloping?) ◼ buyer’s reservation price (willingness to pay) – The largest dollar amount the buyer would be willing to pay for a good – The benefits the buyer expects to receive (from having it) – The reservation price of the marginal buyer declines as the quantity of the good bought increases
The daily demand Curve for pizza in Chicago Figure 3.1, P. 64 Exercise 3. 1. P 64 Reservation p when Qd=10k 3 Qd when P-$2.50 Demand 0 81216 Quantity(,000s of slices/day)
7 The Daily Demand Curve for Pizza in Chicago Figure 3.1, P.64 Exercise 3.1, P.64 -Reservation p when Qd=10k -Qd when P=$2.50
D vS Qd Qd Relationship A number at a given between P and Qd P a curve A point on the curve Reasons for change: Reasons for change change in factors change in P only other than p Change: a shift of the Change: a movement entire curve along the curve
8 D vs. Qd D Qd A relationship between P and Qd A number at a given P A curve A point on the curve Reasons for change: change in factors other than P Reasons for change: change in P only Change: a shift of the entire curve Change: a movement along the curve
Assumption: Other Things Equal the other things factors affecting d -price of related goods complements vs. substitutes --income: normal vs, inferior preference --expectations(prices, income,.. --population --others
9 Assumption: Other Things Equal ◼the other things: factors affecting D --price of related goods complements vs. substitutes --income: normal vs. inferior --preference --expectations (prices, income, …) --population --others
An Increase in the Quantity Demanded versus an increase in deman d Figure 3.10, Increase in quantity demanded Increase in demand 63 D 024681012 DD Quantity(,000s of cans/day) 0 12 Quantity(1, 000s of cans/day) 10
10 An Increase in the Quantity Demanded versus an Increase in Demand Figure 3.10, P.73
